A Reasonable Redemption SNAFU

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They’re barely out of the gate, but already there’s a problem with Reasonable Redemption Values.  Reasonable Redemption Values (RRVs) are estimates of the redemption value one might reasonably get from various types of miles and points.  In yesterday’s post, “Reasonable Redemption Values taking shape,” I presented the following table that shows the RRVs in cents per point for various airlines and cabins:

RRVs based on estimated ticket value:

 American Delta Southwest United Domestic Economy 1.33 1.02 1.65 1.37 Domestic First 1.01 0.78 1.03 International Economy 2.12 1.70 2.44 International Business 2.58 1.86 2.56 International First 2.71 2.29

The Delta Domestic First Class redemption is interesting, as cardholders should note that their RRV will be closer to 1 with the PWM option.

I am probably going to take a lot of heat for this, but if each point is really only worth about 2 Cents even for International Premium Airfares, why not just MS the heck out of the Barclays Card at 2.2cpm?

when there’s PWM option, the delta value should never be below 1.0. If someone is redeeming for below 1.0, I would say their redemption is NOT reasonable taking that out of the math.

RRVs should never be below 1 for Delta, because you can always get a penny a point for them if you have their credit card.

All of the above comments share the same incorrect root assumption.  Whether the commenters know it or not, each above comment makes the underlying assumption that RRVs are based on retail flight prices.  With economy cabins, that’s true.  With premium cabins, it is not true.  With premium cabins, I made the following value assumptions:

• Domestic first class is “worth” 1.5 times economy
• International business class is “worth” 2 times international economy
• International first class is “worth” 2.5 times international economy

These assumptions of “worth” or “value” are intentionally less than observed ticket prices.  The thought is that even though premium cabins cost much more than economy, we don’t necessarily value the difference as much as the price indicates.

Here’s a way to think about this: if a first class international flight costs \$10,000, but you value it at only \$5,000, then even US currency pennies are not worth 1 cent each when redeemed for this flight. In this scenario, pennies would have an RRV of half a cent each.  Yes, its confusing.

I ran a number of scenarios to compare real world economy ticket prices to real world premium cabin prices and found the following averages with my small sample:

• Domestic first class costs 2.8 times economy
• International business costs 3.2 times international economy
• International first class costs 6.5 times international economy

If I were to recalculate RRVs based on estimated retail prices (using these multipliers), we would see a very different result:

RRVs based on estimated ticket prices (rather than value)

 American Delta Southwest United Domestic Economy 1.33 1.02 1.65 1.37 Domestic First 1.89 1.45 1.91 International Economy 2.12 1.70 2.44 International Business 4.44 3.03 4.14 International First 7.74 6.00

Note that by basing the chart on retail prices, you can see that Delta SkyMiles will result in more value with traditional awards in premium cabins (even domestic) than would pay with points options (which give a value of 1 cent per mile).  You can also see that AA, Delta, and United miles are much more valuable when used for international premium cabins.  You won’t get nearly as much value using a fixed value point program (such as Arrival) or fixed value miles (pay with miles) to purchase premium international cabins.

A fix is needed

Going into this project, I had thought that RRVs would be easier to understand and use than Fair Trading Prices.  The fact, though, that smart people immediately misunderstood the meaning of the RRVs in yesterday’s post suggests to me that the concept isn’t as easy to understand as I thought.  Even though I developed the RRVs, it took me a while after reading some of those comments to figure out the misunderstanding.  My first reaction, to be honest, was “yep, you’re right” before I finally caught on to the underlying issue.

I could continue on unabated in the direction I’ve taken so far and use long posts like this one to explain to each new reader what’s going on.  That seems like a bad idea to me.  Metrics are only useful if they are understood.

An easy fix would be to simply change the estimated value in the spreadsheet to be based on estimated ticket prices (as I did in the second table above).  The term “value”, then, would mean something like “the price you would likely have to pay for that flight and cabin combination.”  This approach has a few advantages:

• The results would be easier to understand
• Pennies would once again be worth 1 cent each
• It would be easier to compare real world redemptions to these values.  For example, if you had the choice between redeeming 125,000 Delta miles and \$100 in fees or paying \$7,500 for a business class flight, you could calculate your real world redemption value as (\$7,500 – \$100) / 125,000 =  5.9 cents per mile.  Then, you could compare that result to the table and see that 5.9 cents per mile is better value that the RRV (3.03), so it is a good use of miles.

The one disadvantage I can think of is that many people truly do not value premium cabins (or premium hotel rooms, for that matter) as high as the corresponding retail prices.  That said, I still think the metric would be more useful if based on estimated prices even if those prices do not correspond with people’s views of “value”.